Discussion:1.469-4

Each dentists is a sole proprietor and each pays rent to the LLC Costsegregation has created large passthrough losses from the LLC Under the passive rules neither dentist can write off the losses due to the 150000. rule Do you think they can group the activities under 1.469-4. and write off the losses?

(d) Limitation on grouping certain activities. The grouping of activities under this section is subject to the following limitations:

(1) Grouping rental activities with other trade or business activities—(i) Rule. A rental activity may not be grouped with a trade or business activity unless the activities being grouped together constitute an appropriate economic unit under paragraph (c) of this section and—

(A) The rental activity is insubstantial in relation to the trade or business activity;

(B) The trade or business activity is insubstantial in relation to the rental activity; or

(C) Each owner of the trade or business activity has the same proportionate ownership interest in the rental activity, in which case the portion of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity.

ii) Examples. The following examples illustrate the application of paragraph (d)(1)(i) of this section:

Example 1. (i) H and W are married and file a joint return. H is the sole shareholder of an S corporation that conducts a grocery store trade or business activity. W is the sole shareholder of an S corporation that owns and rents out a building. Part of the building is rented to H's grocery store trade or business activity (the grocery store rental). The grocery store rental and the grocery store trade or business are not insubstantial in relation to each other.

(ii) Because they file a joint return, H and W are treated as one taxpayer for purposes of section 469. See §1.469–1T(j). Therefore, the sole owner of the trade or business activity (taxpayer H–W) is also the sole owner of the rental activity. Consequently, each owner of the trade or business activity has the same proportionate ownership interest in the rental activity. Accordingly, the grocery store rental and the grocery store trade or business activity may be grouped together (under paragraph (d)(1)(i) of this section) into a single trade or business activity, if the grouping is appropriate under paragraph (c) of this section.

Example 2. Attorney D is a sole practitioner in town X. D also wholly owns residential real estate in town X that D rents to third parties. D's law practice is a trade or business activity within the meaning of paragraph (b)(1) of this section. The residential real estate is a rental activity within the meaning of §1.469–1T(e)(3) and is insubstantial in relation to D's law practice. Under the facts and circumstances, the law practice and the residential real estate do not constitute an appropriate economic unit under paragraph (c) of this section. Therefore, D may not treat the law practice and the residential real estate as a single activity.

That was my fear - 100% sole proprietor and 50% LLC member... The rent is only from the two dentists.... What about material participation since they are at the building every day it is open, there are no other managers?

So no 25K allowance My suggestion is that they ask for a loan modification at the bank since they are both guarantors on the note and pull the building out of the LLC and hold as undivided interests going forward and they will just have to wait until they sell to get the suspended passive losses. Your thoughts?